Banks go with the new flow

Last September came the news that hoax emails were directing online banking
users to bogus banking websites and the heads of online banking in Australia
held their collective breaths. Online banking had been one of the few internet
success stories in Australia but how would its phenomenal growth hold up against
such a blatant attack on its security?

It did hold, and in the months following the original scare (and through
others since) transaction numbers continued to grow steadily. In the 12 months
to May 2003, banking and finance website user activity (as measured by
Nielsen/Netratings, which measures unique users visiting a website at least
once) grew by almost 24 per cent, while the total internet market grew by 8.7
per cent. Confidence held up, too. Non-users of internet banking reported a
small dip in confidence, in a survey by analyst MISC Australia, but confidence
increased from 83 per cent to 86 per cent among those who already used online
banking.

Then in May the Commonwealth Bank was hit by a similar online scam and in
early July a US-based deception targeted Westpac and ANZ online banking
account-holders, requesting them via email to "reactivate" their accounts in
bogus websites. It appears that no account-holders responded.

It would seem that online banking in Australia is well past the stage of
fragile infancy. As a MISC Australia spokesman says: "It's clear that internet
banking is no longer a toy that people are casually playing with. It's become
part of their normal banking behaviour. You need a major upset to change
that."

Australians have indeed embraced internet banking.

According to a Citibank/ACNielsen.consult survey, 86 per cent of Australians
have used it at least once, giving Australia the second-highest usage of
internet banking in the Asia-Pacific region, behind South Korea.

According to Nielsen/Netratings, more than 4 million people visited a banking
and finance website in May 2003. During the quarter to March 2003, 40 million
transactions were carried out over the internet, says MISC Australia. New
registrations continue to rise.

MISC Australia describes this as "extraordinary". It may be yet another
example of Australians' tendency to embrace new technologies but it helped that
it was fairly sophisticated by the time internet banking arrived here.

"Most of the bugs were already ironed out," a MISC spokesman says, "and the
banks had already started playing around with some of the bells and whistles
that have added functionality to the sites."

It may also have helped that the introduction of internet banking in
Australia started as bank fees began rising, while the transactions of internet
banks were fee-free. "That made the channel very appealing and very easy," says
Mark Henning, a director at Nielsen/Netratings.

For the financial institutions, online banking has become just another vital
channel, says James Meldrum, banking and financial services analyst at
ACNielsen.consult. "Banks are not seeing online (banking) in isolation any
more," he says. "Where they used to create separate online divisions, now they
have reintegrated it into the bank's operations."

Commonwealth Bank has experienced growth of more than 40 per cent in the use
of Netbank in the past 12 months; its 1.3 million registered users make it the
top banking and finance website in Australia. Half of all new account-holders
now request internet access, says Marcus Judge, the bank's general manager for
e-commerce. To cater for the increased demand, the Commonwealth recently hired a
consortium comprising IBM Business Consulting Services and Irish firm Eontec Ltd
to overhaul its Netbank.

Of Netbank2, due to be unveiled early next year, Judge says the upgrade
should support future anticipated growth and improve the site's
functionality.

Security is an issue, Judge says, but people are gaining confidence, aided by
the bank's guarantee that funds will be safe - if they keep their passwords and
PINs secure. That backstop hasn't been tested yet, says Judge.

"We haven't had a security breach yet."

The number two bank is Westpac, with 966,000 users, according to
Nielsen/Netratings. Westpac eChannels head Paul Jennings says online
transactions now nearly equal the five million transactions conducted through
its 850-branch network. On a peak day the website handles 300,000 customers.

Westpac is upgrading from Windows NT to Windows 2000, which Jennings says
will allow the bank to increase capacity, but the in-house application requires
fine-tuning. This includes making the internet banking interface accessible
across all parts of the bank's operations.

Jennings says Westpac has been swift to react to the recent scares, which he
describes as "more of a nuisance factor than a real security breach".

Bendigo Bank has also been tweaking its internet banking interface. The
regional bank regards internet services as crucial to future growth, says Andrew
Watts, the bank's chief manager of network development and planning.

"Without e-banking you would jeopardise the retail banking operation," he
says. "You'd risk losing customers who have come to expect a good internet
banking service and you'd limit your opportunity for growth."

An almost 60 per cent increase in users over the past year has boosted
Bendigo Bank to number seven in Nielsen/Netratings' assessment of banking and
finance websites.

Other second-tier and regional banks, such as St George, the Bank of South
Australia, BankWest and Adelaide Bank, plus credit unions and building societies
and other new players, have made big gains in market share during the past 12
months, as they see the opportunities provided by internet banking.

The overwhelming winner has been ING Direct, a transaction-only savings
account owned by Dutch banking giant ING Bank. In the year to May 2003, ING
Direct's audience grew by more than 243 per cent, putting it among the top 10
banking and finance websites in the country.

ING chief executive officer Direct Vaughn Richtor says the site's
straightforward interface focuses on doing one thing extremely efficiently. "We
always reject any suggestions to add additional features to the site because we
want it to remain efficient and uncluttered."

ING Direct has no branch presence, which hasn't been an obstacle to winning
market share, Richtor says. "Banking is an intangible thing. And while it's
important, it's not something people want to spend any more time doing than they
have to."

Confidence in internet banking was also seen in the launch of Virgin Credit
Card in May. With applications available only through the internet, 96,000
visitors accessed the Virgin credit-card website and 299,000 visited the
VirginMoney site.

ACNielsen.consult's Meldrum says the cross-selling of financial products has
not been fully exploited by financial institutions. "Being able to leverage the
acceptance of internet banking into increasing the number of products per
customer is the holy grail now," he says.

Applications for smaller products such as credit cards, personal loans and
insurance investment products have increased significantly online, reaching 1
million in the June quarter last year, according to MISC Australia, but have
since tapered off. "This is a very, very new thing," says a MISC spokesman.
"We've only been measuring it for three quarters and some banks are still adding
this capability. It is a fairly complex thing to set up."

MISC Australia believes another development taking online banking to the next
frontier is online bill presentment. Last year 27 per cent of billers had
introduced online bill presentment in some form - either BPay View, Australia
Post's Postbillpay, or through company websites, and Australians flocked to use
it. "This is virtual world sort of stuff, where people are paying bills without
actually seeing them - which is pretty brave, when you think about it," says the
MISC spokesman.

Two derivations of electronic billing† yet to take off in Australia are
ATM bill presentment and payment, and the integration of billing into accounting
software such as MYOB or Quicken, which receives, processes and pays the bill.
"That's real space age stuff," says MISC. "But that's very close."

One online banking service† languishing in Australia, as in much of the
world, is account aggregation. Of 10 or so aggregation services launched in the
past two years, four have closed.

BPAY: a bill payment system developed by Australia's financial
institutions that allows users to pay bills directly from their bank or credit
union account through phone or internet banking. There are 10,000 billers
offering BPAY.

POSTbillpay: a phone and online bill payment service that grew out
of Australia Post's over-the-counter bill payment service. It allows users to
pay bills using their savings/cheque or credit card accounts by phone or via the
POSTbillpay website. Some 21 billers also offer an electronic bill presentment
service via the website.

Electronic Bill Presentment: allows bills to be displayed and paid
via a website - hosted by a financial institution, the biller's own website or a
third party specialist bill presentment website such as POSTbillpay. The service
often includes emailing users to alert them of a bill's arrival.

Account Aggregation: summarises a user's online financial
information, including account balances, reward programs and bills, into a
single webpage without having to separately log on to the websites of each of
the financial institutions. It may be hosted by an internet banking site or by a
third party.

Not an impressive aggregate Australians have mostly ignored account
aggregation, despite its promises of convenience for customers and cross-selling
capacity for those who host it. Account aggregation was launched with much hype
and hope in 2000, touted as a service that would allow users to consolidate all
their financial information into one website. By 2001 most major financial
institutions and several smaller players had some form of account aggregation
service. But over the following 18 months four such services were closed
down.

The latest to go is the Commonwealth Bank's myonlinesummary, which closed in
May. The bank's general manager for e-commerce, Marcus Judge, said there was a
lack of demand for the service, possibly because it offered a level of
sophistication that customers weren't ready for. "Banks haven't offered this
kind of service in the past so it was a brand-new idea altogether," Judge says.
"It seems that customers are more interested in simple everyday things like
paying bills online."

ACNielsen.consult analyst James Meldrum says account aggregation promised a
lot but hasn't delivered. "What we've found is that there is a strong intention
to want it," he says, "but when you ask customers how important various features
are it comes well down the list behind other features like, say,
straight-through processing of transactions."

Meldrum says one barrier may be the small number of financial institutions in
Australia. "Only about one-third of Australians have more than one online
banking account, so perhaps it's a question of 'What's there to aggregate?'" he
says.

One aggregation service that has prospered is Westpac's Other Accounts. By
May 2003 it boasted 80,000 registered users - many more than any other
aggregation site.